Why did Apple buy Beats?

Ever since the news was leaked by the FT that Apple was in talks to acquire Beats Electronics for around $3 billion, analysts have been scrambling to release their thoughts. Most of it centres around the fact that on the surface, the deal doesn’t seem to make sense. While Facebook and Google have been involved in various major deals, Apple’s biggest acquisition to date was the $430 million purchase of NeXT, which bought Steve Jobs back to Apple. In turn, this radical departure from a company that only used to buy companies for core technology which are later integrated into their products, has led many to claim, yet again, that the company is doomed without Steve Jobs.

However, I think that once you boil it down, there isn’t much to get. In many ways it is similar to existing Apple practices and could help the company to cover it’s weaknesses.

Apple grew to fame with the launch of the iPod. Becoming the de facto MP3 player, iPods and the iconic white headphones were everywhere. iTunes led the digital revolution that led many to drop physical media and move to buying singles online. To many, Apple was a core part of music. Now however, people are streaming media online with Spotify and Pandora. With this shift it’s been left behind, with no comparative streaming service. Apple could always build it’s own streaming service, but Jobs didn’t believe that they were worthwhile, meaning that they lost precious time. iTunes music sales are falling and it’s in need of a regeneration. Now playing catchup, it’s easier to buy one, especially one offering unique curation services. At the same time, the Beats brand means they can continue to offer the service on Android without making it seem like Apple is moving to offer services on Android devices.

Alongside the purchase of the company, Jimmy Iovine, Beats CEO and music executive, who has worked with Apple before, is moving to a full-time role within the company. It’s been rumoured that Apple has been struggling to sign agreements with record companies for a streaming service and although existing Beats agreements won’t carry over to Apple with the purchase, he’s in a good position to help them. He knows the music industry inside and out, with plenty of contacts to get the deals done. Eddy Cue, who currently works on deals like this, is likely working flat-out fixing the company’s internet services, including iCloud and possibly working on a new Apple TV. This deal means Iovine can work on the music side, freeing him up for other things. At $3 billion, it’s not a massively expensive acqui-hire for a company with $150 billion in cash.

In the past Apple has purchased companies which would later provide a key feature to their products. The purchase of P.A. Semi was a key force in the companies work to design their own custom processors; Siri became a core feature of iOS and the company acquired various maps companies before launching their own Maps app. While these were unknown brands and mainly purchased for the technology, maybe similar logical was used for this deal and it just so happened that the company was also a popular brand as well. Just like these previous companies, maybe an  existing technology or future Beats product could be key to the Apple product pipeline. It might seem crazy now, but in a few years it could all make sense.

From a purely value perspective, the deal doesn’t look bad. Beats revenue is stated to be around $1 billion this fiscal year and the company is profitable. In a world where Facebook is buying Whatsapp for $19 billion even though the company has no revenue, it’s certainly not crazy on paper. Headphones are a growing business and a streaming service could become invaluable. We’ve seen signs that others believe that it’s a solid investment, with The Carlyle Group, one of the world’s leading private equity companies, investing in Beats late last year. They don’t invest in companies with small potential, chasing after major growth. Either Beats has technology that could play a key role in the future or this shows the potential upside of existing products.

Still, even with all of this analysis pointing to the fact that the company has the potential to be a good purchase, perhaps even laying the foundation for a main feature in the future, many will claim otherwise. Perhaps it is a sign that the company has changed, but that’s not always a bad thing. At the end of the day, a company that launched last year’s iPad presentation with the video “A Thousand No’s for Every Yes” is unlikely to have changed mission drastically within a year. Although it might be a mystery now, it’s probably just part of the product roadmap.